Standing Committee F

Mr. Roger Gale

Finance Bill

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38)

Joe Benton: Good morning, ladies and gentlemen. I am pleased to see that you have made rapid progress during my absence.Schedule 26 Derivative contracts

Schedule 26 - Derivative contracts

Howard Flight: I beg to move amendment No. 119, in page 324, line 31, at end insert—
 '(3) Nothing in this Schedule shall cause or require the recognition of income chargeable to tax by reason of any transactions involving futures or options by the trustees of an authorised unit trust or by an open-ended investment company, and ''company'' and ''derivative contract'' shall be interpreted accordingly.'.
 I warmly welcome you back to the Chair, Mr. Gale. 
 Amendment No. 119 is essentially a probing amendment. It seeks to ensure that the tax treatment of dealings in derivatives by open-ended collective investment schemes is clear so as not to both discourage their usage and incur unnecessary accounting problems. The current position for unit trusts and pension funds contrasts sharply with the unclear tax treatment of derivatives for investment trusts. Consequently, derivative activity in closed-ended funds is mostly conducted by funds based outside the UK. In principle the repeal of the relevant sections will not have an adverse tax effect on existing unit trust and pension schemes, which is the first logical point for repealing them. 
 The key point is the risk that, at the end of the year, accountants will want to see an audit trail of decision making behind every derivative transaction. That is not currently required because open-ended schemes rely on section 468AA of the Taxes Act 1988, which provides a blanket exemption from tax issues. Not only would the necessary audit trail be administratively burdensome but it could deter open-ended funds from using derivatives, which is not the intent behind the schedule. 
 A further complication is that open-ended vehicles are bought daily by investors, and the price of those vehicles also changes on a daily basis. It would be extremely complicated if, at the end of an annual audit, the auditor were to decide that the tax treatment was not as originally envisaged by the fund manager or trustee. That would mean that the prices at which many transactions had taken place were wrong, and 
 correcting that would be a nightmare. I hope that the Government have a ready answer to deal with that important practical point.

Dawn Primarolo: Good morning, Mr. Gale. It is nice to see you back in the Chair. We worked hard in your absence so that you would be pleased on your return by the progress that we had made, and we will continue to make progress under your guidance.
 The hon. Member for Arundel and South Downs (Mr. Flight) raises an important point. This area is hugely complex and there is a long history of attempts to ensure that the tax rules in it are correct. At every opportunity the previous Government and our Government tried to ensure that the rules taxed appropriately without adding constraints or creating uncertainty for that highly complex market. I appreciate the point behind the hon. Gentleman's amendment about the tax position of authorised unit trusts and open-ended investment companies. 
 I appreciate also that over the past few weeks companies have been in doubt about whether the clause offered the certainty that they previously thought it did. As the hon. Gentleman pointed out, that has happened because certain sections of tax law, which appeared to give certainty, were repealed and their absence appears to give less certainty. 
 I am sure that the Committee will be mightily relieved to hear that the hon. Gentleman and I do not intend to have a technical debate on the clause. I am particularly reluctant to have such a debate because I know that the hon. Gentleman is something of an expert in the area and has written a book about it, which is out of print.

Chris Grayling: The Paymaster General has been trying to find a copy.

Dawn Primarolo: Indeed. At one stage, I thought that it might be wise to track down a copy.
 I fully appreciate that the funds need the certainty that capital profits will not be taxed. I also understand the concern that the removal of the protection that the funds enjoyed under section 468AA should not allow the Revenue to tax funds by using the argument of trading. We accept that. Since the amendment was tabled, we have had the opportunity for further discussions with the industry, and I shall explain their conclusions. 
 I shall first state why we believe that concerns are unfounded. The new rules will give authorised funds greater certainty than they currently enjoy about the treatment of profits from a wider range of derivative contracts . As well as applying to futures and options, the new exemption extends to contracts for differences such as swaps. Relief from taxation on capital profits is therefore being extended. The rules are explicit that where a fund accounts for profit as capital under its accounting laws it cannot be taxed. The amendment is not necessary because that position is clear. 
 Where income is available to distribution to unit and shareholder trusts, the situation becomes more complicated, because that carries a tax credit. The 
 amendment would create a mismatch, and an opportunity for avoidance—I accept that that is not the hon. Gentleman's intention—and therefore a loss to the Exchequer. It would not be correct for investors to be able to gain a tax credit when no tax had been paid on the fund. 
 The Inland Revenue met the relevant representative bodies to discuss the matter. It agreed, after it explained to the companies how the system would operate, that it is crucial that the guidance, which deals specifically with some of the issues that the hon. Gentleman raised, is clear. With all the changes to the clauses, the Revenue, with the companies and representative organisations, is focusing on the guidance to ensure that it is very clear. The Revenue officials and I are grateful for the helpful suggestions that have been made. We are more than happy to take them into account to ensure that the position as the Revenue understands it, which is that there is greater certainty, is clear with respect to the tax rules. As I understand it, the interests concerned with that proposition are now satisfied. 
 It is always important when dealing with complex matters to ensure that the consultation on changing the rules is correctly conducted and that people are able to comment fully on all the procedures. Originally, the unit trust industry decided that it wanted to stay under the old rules rather than be included in the new arrangements. We were perfectly happy to accommodate it. Late in 2001 it decided that it would be better to be included in the new rules, which are an improvement, so we have not been able to spend quite as much time as we might have done consulting other interested parties. 
 I believe, however, that the consultation has now reached a successful conclusion. I hope that that is the information that has reached the hon. Gentleman. I am happy to put on record an acknowledgement of the issues that were raised. We believe that they have been dealt with by guidance that makes the matter absolutely clear, and on that basis I hope that the hon. Gentleman will be prepared to withdraw his amendment. 
 In conclusion, because of the complexity of the issue, it is important that the Government continue to draft guidance, discuss how the rules operate and keep an open mind about any fine-tuning that may be needed in future. I hope that none will be necessary, because the Revenue officials, to whom I would like to pay tribute—even though it is perhaps unusual to do so—have undertaken a splendid and detailed consultation, which I believe has been recognised and appreciated by everyone involved in the markets. As I said, I hope that the hon. Gentleman feels happy—at this stage, at least—and will agree to withdraw his amendment. If not, we would reluctantly have to oppose it, and that would be a bad start to the morning.

Howard Flight: May I echo the Minister's comments about the Inland Revenue? Despite the complexity of the issue, an amazing effort has been made to sort out
 highly complex tax matters. I am pleased to hear the Minister's assurances that this latent issue has been addressed and, therefore, beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendments made: No. 174, in page 332, line 27, leave out from 'which' to 'or' in line 28 and insert ', if the future were to run to delivery, would fall to be delivered at the date and price agreed when the contract is made,'. 
 No. 175, in page 332, line 33, leave out paragraph (a) and insert— 
'(a) where the contract for differences relates to fluctuations in the value or price of property described in the contract, the property so described, or'.
 No. 176, in page 333, line 18, leave out 'referred to' and insert 'described'. 
 No. 177, in page 333, line 23, at end insert— 
'( ) a future; 
 ( ) an option;'.
 No. 178, in page 334, line 4, leave out from 'terms' to 'not' in line 8 and insert 
'provide— 
 (a) that, after setting off their obligations to each other under the contract, a cash payment is to be made by one party to the other in respect of the excess, if any, or 
 (b) that each party is liable to make to the other party a cash payment in respect of all that party's obligations to the other under the contract, 
 and do'.
 No. 121, in page 337, line 13, leave out second 'or' and insert— 
'(aa) so much of any exchange gain or loss arising to a company as results from any translation from one currency to another pursuant to section 93A(4) of the Finance Act 1993 (c.34) of the profit or loss of part of the company's business and falls within sub-paragraph (5A), or'.
 No. 122, in page 337, line 18, at beginning insert 'For the purposes of sub-paragraph (3)(a),'. 
 No. 123, in page 337, line 29, at end insert— 
 '(5A) For the purposes of sub-paragraph (3)(aa), an exchange gain or loss falls within this sub-paragraph to the extent that, in accordance with generally accepted accounting practice, an amount representing the whole or part of it is carried to or sustained by a reserve maintained by the company.'.
 No. 124, in page 341, line 28, at end insert— 
 '(3) Sub-paragraph (4) has effect where, in the case of a derivative contract of a company,— 
 (a) the company uses, as respects the contract, a basis of accounting other than an authorised mark to market basis of accounting for an accounting period (the ''preceding period''), but
(b) by virtue of sub-paragraph (2), the company must for the succeeding accounting period (the ''first mark to market period'') use, as respects the contract, an authorised mark to market basis of accounting as its authorised accounting method for the purposes of this Schedule. 
 (4) Where this sub-paragraph has effect in relation to a derivative contract of a company, the company shall be deemed— 
 (a) to have disposed of the contract immediately before the end of the preceding period for a consideration of an amount equal to the fair value of the contract at that time, and 
 (b) to have reacquired it for the same consideration immediately after the beginning of the first mark to market period.'.
 No. 125, in page 344, line 40, at end insert— 
 '(3) No debit may be brought into account by virtue of this paragraph if it is taken into account in arriving at the amount of expenditure in relation to which a debit may be given by Schedule 29 to the Finance Act 2002.'. 
 jf1ÝNo. 126, in page 345, line 17, at end insert— 
 '(4A) In this paragraph ''option'' has the same meaning as in paragraph 12, apart from sub-paragraph (10).'.
 No. 120, in page 360, line 42, leave out sub-paragraph (3) and insert— 
 '(3) Where— 
 (a) a company ceases to be party to a derivative contract in an accounting period (the ''cessation period''),
(b) profits or losses arise to the company from the derivative contract or a related transaction in the cessation period, and 
 (c) the credits or debits brought into account for the purposes of this Schedule for the cessation period do not include credits or debits which represent the whole of those profits or losses, credits or debits in respect of so much of those profits or losses as are not represented by credits or debits brought into account for the cessation period shall continue to be brought into account under this Schedule over one or more subsequent accounting periods (''post-cessation periods'') as in the case of a derivative contract to which the company is party in those periods and sub-paragraphs (3A) and (3B) shall apply. 
 (3A) In any case falling within sub-paragraph (3), any question— 
 (a) whether, in a post-cessation period, the company is, or is to any extent, party to the contract for the purposes of a trade carried on by it, or 
 (b) whether, in a post-cessation period, the contract is to any extent referable to a particular business, or a particular class, category or description of business, carried on by the company, shall be determined by reference to the circumstances immediately before the company ceased to be party to the contract instead of the circumstances in the post-cessation period. 
 (3B) In any case falling within sub-paragraph (3), any question— 
 (a) whether the contract has to any extent a particular purpose in a post-cessation period, or 
 (b) whether there is a connection between the company and any other person for a post-cessation period, 
 shall be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.'.—[Dawn Primarolo.]
 Schedule 26, as amended, agreed to. 
 Schedules 27 and 28 agreed to.

Clause 102 - Discounted securities etc

Howard Flight: I beg to move amendment No. 167, in page 80, line 15, at end insert
'or for the transfer of the whole or part of a business or interest in a business carried on by him or by him and others in partnership;'.
 Clause 102 makes two changes to the rules for relevant discounted securities—that is, securities held by persons not within the charge to corporation tax and issued at a discount compared with the eventual amount payable on redemption. 
 The first change relates to an earn-out right in the form of a qualifying corporate bond when a double charge to both income tax and capital gains tax could arise. Modifications in the Bill, which is deemed always 
 to have had effect, includes the value of the earn-out right in the issue price of the security, which should eliminate the risk of double charge. 
 The second change is a restriction on any loss on the transfer to a commercial person of a relevant discounted security by a person who acquired it on its issue, paid more than its market value at the time of issue and is connected with the issuer. There is a similar effect when the issuer is a closed company and, although the person in question may not be connected with the closed company, he and any other persons who issue securities of the same sort taken together control the company. The new rule applies from 26 March 2002 when the change was announced and restricts the loss in such cases. There is no motive test. 
 The Law Society is the main professional body to comment on the clause and is essentially the author of the amendment. Its purpose is to ensure that the clause applies when business assets as well as shares or debentures are exchanged for earn-out rights.

John Burnett: I endorse the point made by the hon. Member for Arundel and South Downs. It is important, especially for small businesses, which often sell assets rather than the shares of the company for tax as well as other reasons. It is also important to retain a flexible economy and to allow people to organise their own affairs satisfactorily. These assets probably provide their only pension, and when selling a business or smoothly passing over a business, often assets rather than shares are sold. I hope that the Government will help the small business sector by accepting the amendment.

Dawn Primarolo: The circumstance of double taxation raised by the hon. Members for Torridge and West Devon (Mr. Burnett) and for Arundel and South Downs is not a problem that the Revenue has seen, and as far as we know it has not arisen. However, the amendment seeks to prevent a double charge to income tax and capital gains tax and, although we do not believe that that would arise, the amendment would make the matter clear. I am therefore persuaded by the hon. Gentlemen that it would be wise to accept it, and I recommend it to my colleagues accordingly.

Howard Flight: What can I say? Thank you, Minister. The issue is obviously not an awe-shaking one, but I have often banged on about the fact that clarity in our tax law is a great virtue to be preserved, and the amendment provides clarity.
Mr. Burnett rose—

Joe Benton: I am sorry, but the hon. Member for Arundel and South Downs has resumed his seat.

John Burnett: On a point of order, Mr. Gale. May I record my gratitude? Double taxation is indeed unfair, and we are very grateful to the Paymaster General, especially at such an early hour.
 The Chairman: That is not strictly a point of order for the Chair, but it is now on the record.
 Amendment agreed to. 
 Question proposed, That the clause, as amended, stand part of the Bill. 
 Clause 102, as amended, ordered to stand part of the Bill. 
 Clauses 103, 105 and 83 ordered to stand part of the Bill.

Schedule 29 - Gains and losses of a company from intangible fixed assets

Howard Flight: I beg to move amendment No. 182, in page 373, line 33, at end insert
'except for those assets that are subject to Part 4, paragraph 26 (Realisation of a pre-commencement asset).'.

Joe Benton: With this it will be convenient to take amendment No. 183, in page 383, line 11, at end insert—
 'Realisation of a pre-commencement asset
 26.—(1)This paragraph applies where there is a realisation of a ''pre-commencement asset'' that is an intangible fixed asset—
(a) that was held by the company, or in the same worldwide group, before commencement, as defined by Part 14 of this Schedule, and
(b) on which no deduction has been claimed under Part 2 of this Schedule.
 (2) The company can elect to tax the realisation of the pre-commencement asset under the ''existing law'', as defined by Part 14 of this Schedule.
 (3) The election must be made in writing to the Board of the Inland Revenue within two years of the end of the accounting period during which the realisation takes place.
 (4) In particular, the making of the election will allow the company to roll over the proceeds on realisation of the pre-commencement asset under the replacement of business assets rules in section 152 of the Taxation of Chargeable Gains Act 1992.
 (5) Where the creation of an intangible fixed asset straddles the commencement date the election may be made only in respect of the pre-commencement portion. The proceeds on realisation should be apportioned between pre and post commencement on a just and reasonable basis.'.

Howard Flight: The amendments are designed to allow companies that held intangible assets before 1 April 2002, on which no deduction has been claimed under the new legislation, to roll over the proceeds on disposal under the old rules—that is, against land and buildings—rather than being able to roll over proceeds against only the acquisition of new intangible fixed assets. In essence, if that were not the case, there would be an element of retrospection in the operation of the schedule. We hope that the Government will take note, and that they will be able to address the issue satisfactorily if they do not accept the amendments.

John Healey: Thank you, Mr. Gale, and good morning. As I said to your co-Chairman on Tuesday, it is a great privilege to join the Committee, and I very much look forward to serving on it under your chairmanship.
 The schedule would enact a major reform of the corporation tax treatment of intangible assets. The reform modernises the corporate tax base, providing relief for the cost of acquiring intangible assets when none had previously been available. Before I turn to the amendments, let me introduce clause 83, and schedules 29 and 30, and explain the background to this important new element of the legislation. It introduces a comprehensive regime that will provide consistent treatment of companies' expenditure and receipts in respect of intangible assets. 
 The new regime replaces an outdated and, in places, incoherent accretion of rules based on judicial decisions and occasional legislation, which had grown up piecemeal over nearly 150 years. It marks a further step in the Government's programme of corporate tax reform, which is designed to ensure that the tax system reflects the realities of today's business and competes with the best in the world. A modern system for taxing intangible assets will encourage companies to take advantage of new opportunities in the knowledge-based economy and will contribute to the Government's goal of increasing national productivity. 
 The proposals have been the subject of extensive consultation. The Government have issued six consultation documents since March 1998. The Inland Revenue has established a consultative group drawing on all representative employer organisations, and draft clauses were published with the pre-Budget report by my right hon. Friend the Chancellor of the Exchequer in November 2001. To that degree, therefore, business and tax practitioners and specialists have been closely involved in the development of the new regime, both individually and through their representative bodies. I pay tribute to all those who made a contribution. The Bill has been very much improved by that process, and the reform has been widely welcomed. The proposals have been developed considerably, particularly through the inclusion of roll-over relief and grandfather clauses. 
 The new regime provides for companies to obtain tax relief for the cost of intangible assets, including goodwill, brand names, trade marks and other intellectual property; in most cases, it will be based on the amortisation reflected in the accounts. The use of accounting write-downs to determine the tax relief breaks new ground, providing greater flexibility and bringing tax and commercial profits closer together. 
 The coverage of the new regime is also broadly aligned with the accountancy definition contained in financial reporting standard 10. That will ensure that relief under the new rules is available for the full range of intangible assets, with very few exceptions. It will enable the new regime to keep pace with commercial developments, without the need continually to add to the legislation to provide relief for new forms of intangibles as they develop in an increasingly fast-moving business world. 
 Mr. Michael Jack (Fylde): Just for clarification—not necessarily now, but before the end of our debate—will the Minister say what he meant by those delphic words ''with a few exceptions''? I am interested to know what has been left out.

John Healey: What the right hon. Gentleman called my delphic words were ''very few exceptions''. I shall be happy to clarify that at the appropriate point.
 Moving from a system of rigid tax rules set out in legislation to one that follows accounting practices will mean that, from the outset, the new provisions, which I hope will be welcomed by all hon. Members, will give us the flexibility for future developments.

Michael Jack: The Minister mentioned accounting practices. I wonder whether he will say a few words about the international dimension. It is clear, post-Enron, that there are significant differences in accounting standards and accounting definitions between, for instance, the United Kingdom and the United States, which may cause problems for multinational and international companies. I wonder whether such conflicts will be resolvable under the proposals.

John Healey: I do not see that such conflicts are likely. We will be dealing in later amendments with a divergence in practice between the USA and the UK. However, the measures draw directly on established accounting rules and practices, so they give us a consistent code under which to operate the tax relief system. We therefore have some certainty that they will operate securely and give us the assurance that we need as we move away from the previous approach, under which tax rules were specified in legislation.
 Under the new regime, disposals of intangible assets will be taxed on an income basis. To ensure that companies have an incentive to reinvest, however, a roll-over relief will apply where disposal proceeds are reinvested in new intangible assets. As I explained, that feature is a direct result of consultations during our preparation of the provision. 
 Intangible assets that companies held on 1 April this year—the date on which the new provisions came into effect—will generally be taxed under current law. That treatment responds to concerns expressed during the consultation by business and experts, who felt that existing capital gains assets should remain subject to the capital gains rules and should be grandfathered on any future sale. Disposals of such assets will, however, qualify for roll-over relief under the new rules for intangibles, rather than under the capital gains roll-over relief.

John Burnett: One point that the Law Society made was that non-trading losses on intangible fixed assets to be carried forward to the next accounting period should be added to the list of carry-forward provisions. Is the Minister saying that the tax treatment of such assets should fall under the capital gains tax regime, not the proposed regime?
 John Healey: If I may, I shall return to that at the appropriate point in my remarks.
 Schedule 29 sets out the detail of the provisions, and schedule 30 sets out the consequential amendments that are needed to other taxation legislation. Government amendments Nos. 212 to 214 are not substantive; they simply correct minor drafting errors that we have picked up over the past few days. They therefore form a proper part of schedule 30. 
 The legislation has been drafted in the new style that we adopted for the tax law rewrite project. The consultation draft that the Inland Revenue published at the time of the 2001 pre-Budget report was widely welcomed for its clarity and, by tax legislation standards, for its relatively plain English. That certainly helped the recent consultation process. 
 The reform in clause 83 and the accompanying schedules marks an important step on the road to a modern and competitive UK corporate tax system. As the hon. Member for Arundel and South Downs explained, the amendments would make capital gains roll-over relief available to companies that dispose of their pre-commencement intangible assets—those that pre-date 1 April—as an alternative to the roll-over relief provided by the new intangibles regime. That gives companies the scope to reinvest gains in a wider range of assets—tangibles and intangibles—and, in some cases, to defer tax on such gains for longer. 
 By way of background, I should explain that the roll-over relief provisions and the rules for dealing with companies' existing assets were the product of the extensive consultation process. The rules were designed to respond to the issues that business raised with us. They have, therefore, been widely welcomed. In particular, the facility to roll-over gains that are taxed as income under the new rules against the acquisition of further intangibles is unprecedented and generous. 
 The transitional arrangements, too, are already generous to companies. Companies are able to benefit from capital gains loss relief, indexation and 1982 values on the disposal of their existing assets at the same time as enjoying the new relief against current income on the assets that they buy.

John Burnett: To put it simply, the regime is predicating a system whereby the gain is brought in to tax but is also shielded and can be used for roll-over within the capital gains tax regime.

Mark Field: On intangibles?

John Burnett: Yes, on intangibles.

John Healey: I shall come to that point. I shall pull together my responses to the remarks that have been made at the end of my comments.
 The transitional arrangements are generous. A range of benefits is available to companies that, at the same time, enjoy the new relief against the current income of the assets that they buy. Roll-over relief has been expanded as a result of the consultation within the new framework, to cover capital gains on all pre-commencement intangibles, not just the limited 
 categories that currently qualify for capital gains roll-over relief. While companies can no longer defer the gains on those disposals when they buy assets within the capital gains rules, they can now do so by reinvesting in not only the limited categories of intangible assets that currently qualify for capital gains roll-over relief but all intangibles within schedule 29.

John Burnett: Are the Government considering enlarging the scope of roll-over relief so that all assets normally available for reinvestment will be considered?

John Healey: The simple answer is that we shall keep the matter, as we generally do, under careful and constant review.
 It is not correct to say that we are limiting the range of reliefs available when pre-commencement assets are sold, nor that the proposals are in this respect unfair to companies, nor that they do not adequately take into account their expectations with regard to existing assets. The hon. Member for Arundel and South Downs suggested that there was an element of retrospection in the provision. I do not accept that argument, and would point out that the consultation on the changes began in March 1998, so the proposals have been in the pipeline and in the public domain, and have been the subject of detailed discussion with many of the representative bodies and interests in the field, for a considerable time. 
 As stated in the background information, the estimated cost of the provisions to the Exchequer is some £200 million, rising in due course to £350 million. I submit that schedule 29 and the clause that it supports represent—by anyone's standards—a generous set of proposals that has been developed in the light of extensive consultation. Finding the right balance between the benefits to be enjoyed by companies from the new relief and their expectations with regard to future disposals of their existing assets has been an important element in the consultation. 
 The proposals represent a balanced package at an affordable, but not insignificant, cost to the Exchequer. The package is both competitive and fair, because it provides relief for all expenditure on intangibles; fair taxation of sale profits; and roll-over relief to ensure that companies have an incentive to reinvest in further intangible assets. 
 The amendment proposed by the hon. Member for Arundel and South Downs would make the package even more generous. It would allow a choice of capital gains or intangibles roll-over relief, and would add to the Exchequer cost and alter the balance of the package. To that extent, the amendment goes too far and cannot be right at the moment.

John Burnett: I am grateful to the Economic Secretary, whom I must congratulate on his appointment. Has the Treasury done an exercise as to the cost if the amendment were made?
 John Healey: I am grateful for the hon. Gentleman's congratulations. The direct answer is yes, and the cost would be about £50 million. The provisions, which are already generous, cost the Exchequer about £200 million a year, and the amendment would add significantly to that. For the other reasons that I have explained, we cannot support the amendment.
 I shall pick up on several of the points put to me by hon. Members during this short debate. The hon. Member for Torridge and West Devon raised a question from the Law Society on what is essentially a minor drafting point. We do not think that it is material. It cropped up in our consideration when preparing the Bill, and the Inland Revenue will monitor matters in case our judgment proves incorrect. 
 The right hon. Member for Fylde (Mr. Jack) picked me up on my reference to ''very few exceptions'', a phrase that I included because there are indeed very few. He asked for examples. One may be life assurance assets, which are subject to the special insurance tax regime. Research development gives rise to special reliefs, and so falls into a different part of the regime. 
 I was asked how many businesses might benefit, given the nature and scope of the new regime. The number will build in time under the new rules, but our best estimate is that about 30,000 companies will benefit that would not have done under the previous regime. 
 On the basis of my remarks, I encourage the hon. Member for Arundel and South Downs to withdraw the amendment. If he is not prepared to do so, I must ask my hon. Friends to reject it.

Howard Flight: If I did not make it clear up front, I should say that the reforms in the clause are welcome. A lot of work has gone into them. My understanding of the net cost of honouring the existing position is that it is not as great as £50 million. I have been advised that it is more like £20 million.
 Is there any prospect of the deal and approach that the Government have taken being unfairly skewed? Without the amendment, a measure that cost £200 million is a big plus to businesses, but some people will obviously have intangibles from before 1 April 2002 and, in running their businesses, will expect the tax rules to be as they were. It is conceivable that sheltering them on disposal by other intangibles, for whatever reason, may not fit their businesses especially well. 
 Given the extensive consultation, what response to the issue have the Government encountered? Is the general view that there has not been much skewing and that the deal is acceptable, or have some argued that it is unfair to certain types of business to change the regime in midstream? It is important to know that because rough justice is not necessarily the answer to this sort of problem.

John Healey: Terms such as ''changing the regime midstream'' and ''rough justice'' are inappropriate, given that we have issued six consultation documents on the matter since 1998. As with other detailed points
 of the proposals, individuals and representative organisations have raised questions and made criticisms, but the total package has been widely welcomed as a reform that goes in the right direction and breaks precedent in a way that is modern and helpful to businesses and their professional advisers. The hon. Gentleman would be hard-pushed to find a representative body or individual that would not want that package to be introduced.

Mark Field: I accept that the Institute of Directors and others have welcomed the proposals, that the measure is not new—it has been around for the past four years—and that there was substantial consultation on it. However, I have a philosophical concern that may not affect the schedule or the amendments but may have a longer-term effect.
 Until 1997, the income and capital taxes regimes were on one stream, but the new Treasury team introduced a change in philosophy. Capital gains tax, especially for small entrepreneurs, is now at a far lower level. I wonder whether provisions that ensure that intangible fixed assets are put on an income rather than capital basis may mean higher rates of taxation for companies on those assets. I suspect that that is not the Government's intention at this juncture, and we have not received representations on it. However, on the basis that rates of income and capital gains taxes have diverged and that there has been an increase in Treasury meddling, which we may see more of in the future, Opposition Front-Benchers may return to the area of intangible fixed assets when we debate future finance Bills. As the Minister said, it is an important area, and goodwill on this matter is important to large and small companies in a globalised and high-information world.

Mark Hoban: I want to raise a couple of points about the impact of changes in markets on the tax cost of the measures. Over recent years, telecom and information technology companies have incurred huge losses as a consequence of the write-down in value of assets because the consideration that businesses paid for those companies some years ago is no longer held to be a fair reflection of their market value. What is the implication of future write-downs on the tax cost set out in the Red Book? If a company such as Vodafone wrote off £0.8 billion of the value of assets acquired from Mannesmann, the transaction would not be covered by the schedule, but if future transactions of a similar magnitude incurred a similar write-down, that might give rise to some variations in the revenue.
 In its representation, the Institute of Directors welcomed the new regime in general but went on to say: 
''the great extent of legislation suggests that the plot, of simply following the accounts, has been somewhat lost.'' 
The Bill and the explanatory notes are somewhat longer than FRS 10, on which the measure is meant to be based.

John Healey: The hon. Member for Fareham (Mr. Hoban) raises an important point, of which we are all conscious in the light of our experiences of such large
 corporate problems. The massive goodwill write-offs that have followed some major takeovers have generally involved the acquisition of shares in the target company, rather than direct purchase of the assets. For clarification, the new relief would not apply in such cases. We are keen to encourage reinvestment in assets and the relief will be available only for new acquisitions, not for write-downs of assets that companies have previously acquired.

Mark Hoban: I am grateful for the Minister's important clarification of the matter. I suspect that in transactions there will be some tension between vendors and purchasers: vendors will be interested in the substantial shareholdings rules and the benefits that they bring; and purchasers will increasingly want to use asset-based transactions to crystallise the goodwill in the transaction and benefit from the tax relief that that brings when the goodwill asset is amortised over however many years. They will also want to catch any major write-downs that may occur in the future if they believe that the value of the business that they have acquired has diminished.

John Healey: I suspect that we shall return in fuller detail to that issue when we discuss a later amendment.
 I welcome and accept the general support offered by the hon. Member for Cities of London and Westminster (Mr. Field) for the reform proposals in the Bill. Perhaps he will allow me to take his specific points as fair warning—if we are fortunate enough to serve on a future Finance Bill together.

Howard Flight: Although the area is very technical, the debate has usefully aired it. I repeat that, overall, the measures are welcome. I remain uncomfortable that some businesses may suffer as a result of what is intended to be, and is accepted as, a positive measure. Our amendment will not be accepted and is not sufficiently material to put to a vote, but I hope that the Government will examine the matter further to find out whether there might be any significant wobbly areas. Nobody would want changes to our tax system to have a material and effectively retrospective impact on previous decisions. That point is different from the one that I made yesterday about retrospective measures. If a business has done a major deal based on current tax rules, there is an expectation in our traditions that it will get grandfathered. That principle should therefore be followed as far as possible. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Joe Benton: I have deliberately permitted a fairly wide-ranging debate on the amendments because the issues are complex and interrelated. Also, the Committee did not have a clause stand part debate on clause 83, so it seemed right for the Minister to have the opportunity to range slightly wider in putting his case than the amendments would otherwise have allowed. That being so, I shall tell the Committee now that, although I am prepared to allow a more wide-ranging debate where matters are interrelated, I shall take that into account when considering whether to allow a stand part debate.
 Mr. Flight: I beg to move amendment No. 184, in page 405, line 44, at end insert—
 '71A (1) This paragraph makes provision for the application of this Schedule where a controlling interest is acquired in a company (the first company) by another company (the second company), such that the first company becomes a member of a group of companies of which the second company—
(a) was already a member; or
(b) is or becomes the principal company.
 (2) Immediately before the time when the second company acquires a controlling interest in the first company, where the first company owns intangible fixed assets, the first company shall immediately before that time be deemed to have disposed of those intangible fixed assets for a sum equal to such amount as shall result in neither a gain nor loss for capital gains tax purposes nor a credit or debit for the purposes of this Schedule as the case may be.
 (3) Immediately after the time when the second company acquires a controlling interest in the first company, such part of the expenditure (the apportioned expenditure) by the second company on the acquisition of a controlling interest in the first company shall be treated as expenditure on acquiring the intangible fixed assets of the first company, as shall be just and reasonable. The tax written down value of the intangible fixed assets of the first company shall be deemed to be equal to the expenditure so apportioned.
 (4) The third person is a company or other person from whom the second company acquired the controlling interest in the first company. Where this paragraph applies—
(a) the third person shall be deemed to have disposed of an intangible fixed asset for a sum equal to the expenditure deemed to have been incurred by the second company pursuant to sub-paragraph (3) above;
(b) the disposal by the third person of the intangible fixed asset pursuant to this sub-paragraph shall be deemed to be a separate asset from the shares in the first company; and
(c) any chargeable gain that accrues to the third person as a result of the disposal of the shares in the first company shall be treated for all the purposes of the Tax Acts as reduced by an amount equal to the expenditure deemed to have been incurred by the second company pursuant to sub-paragraph (3) above (and an allowable loss will be deemed to be increased by a like amount, as the case may be).
 (5) The intangible fixed asset deemed to have been disposed of by the third person for the purposes of sub-paragraph (4) above shall be treated as having been created or acquired (as the case may be) at the time that the intangible fixed asset owned by the first company was acquired or created by the first company.
 (6) In sub-paragraph (2), (3) and (5) above, references to the first company shall include references to one or more companies that were not in the same group as the second company before its acquisition of a controlling interest in the first company but as a result of that acquisition are in the same group as the second company after the acquisition.
 (7) For the purposes of this paragraph, the second company acquires a controlling interest in the first company if the two companies are not in the same group and there is an acquisition by the second company of shares in the first company such that those two companies are in the same group immediately after the acquisition.
 (8) This paragraph shall apply only if an election in writing is made jointly by the second company and the third person, such election to be made within the period commencing with the acquisition of the controlling interest in the first company and ending two years later.'.
 The amendment picks up the issue that my hon. Friend the Member for Fareham has already raised. It is aimed at resolving the anomaly where the acquisition of assets results in a materially better tax result for the acquirer than if they had acquired the shares of the company carrying on the trade. Under the current provisions, where a company acquires a business from another person, the goodwill becomes 
 purchased goodwill, as defined under generally accepted UK accounting practice, and hence may be tax depreciated, but if a company acquires the shares of a company carrying on a trade, as the Minister commented, the goodwill may not be amortised. 
 Clause 44 contains measures that operate in the entirely opposite direction, which make it much more attractive for vendors to dispose of shares than to dispose of assets. My hon. Friend the Member for Fareham referred to tension, but I see potentially more than that. The proposals may encourage complex schemes for deals that would put money into clever corporate financiers' pockets, and we do not want to create such complexity. I was unhappy to hear the Minister say earlier that the measure was intended to apply only to assets, not to shares. I take that to be the Government's position, and if their position is unchangeable, measures that are otherwise positive may bring with them many problems.

John Healey: As the hon. Member for Fareham mentioned during our discussion on the previous set of amendments and as the hon. Member for Arundel and South Downs explained, there is a perceived tension in the Bill between the intangible assets reform and provisions in clause 43 on the exemption for substantial shareholdings. The amendment addresses that perceived tension with a provision that appears to be based on section 338 of the United States internal revenue code. This is not a new issue. We raised it during the consultation process, we considered it carefully when drafting the Bill and we shall keep the matter under review, as I explained to the right hon. Member for Fylde.
 Both the intangibles and the substantial shareholdings reforms were developed following extensive consultation with business. In each case, the final outcome has been welcomed by business. Both reforms address what are, by anyone's standards, long-standing problems in the corporate tax system, which needed to be overhauled. At the asset tier, the new intangibles regime modernises the corporation tax base and removes the distortion against acquiring intangible assets. At the shareholder tier, the substantial shareholdings exemption removes a major obstacle to commercial restructuring. 
 We have included in schedule 29 a measure that will extend the intangibles roll-over relief to cases where a company reinvests by acquiring a controlling interest in another company and that newly acquired company has intangible assets within the regime. I hope that the Committee appreciates that this innovative rule will provide for a greater degree of neutrality between acquisitions in share and asset form, and that it will afford greater flexibility to companies as the number of assets within the new regime increases. 
 All in all, the reforms provide a sensible framework at shareholder and asset tiers that will enhance the competitiveness and flexibility of the UK corporate tax system. However, we understand the points that have been made about it. As I said earlier, we shall keep the matter under review. As we monitor the 
 impact of the new regime in its first few years of operation, we shall consider the case for a further measure along the lines of the United States section 338 model should the evidence warrant it. However, I warn those hon. Members who may wish to press the point now or on Report that a range of factors will need to be taken into account. 
 The potential cost would need to be considered carefully. An elective provision of this sort, which would generally be used by companies only when there was an overall tax benefit to them, would be likely to carry a significant Exchequer cost. The amendment would increase that cost, as it appears to bring existing intangible assets within the new regime while they remain in the hands of the company that held them prior to commencement. Under the schedule, those assets are outside the regime until they actually change hands. 
 It is by no means clear that the proposed new paragraph would work satisfactorily in practice. I shall not go into the technical detail here; it will be more appropriate to do it in consultation with experts. However, it is a technically complex area and legislation along such lines would need to be developed in consultation with business to ensure that it achieved the objectives that we might wish for potential provisions of that nature. The amendment would also allow intangible assets to be treated as bought and sold under the election, but no other assets. It is hard to see why that should be so. The US equivalent rule applies to all assets, not only intangibles. 
 I assure Opposition Members that we will continue to keep the matter under review. We shall assess the impact of the reforms introduced in the Bill, and we shall consult business on future reforms to corporation tax. I would therefore encourage the hon. Member for Arundel and South Downs to withdraw the amendment.

Howard Flight: I am glad to hear the Minister saying that the Government accept the tension, and that they are willing to keep the matter under review and consider following the US section 338 model. As the new economy sector recovers over the next few years, intangibles will be more important than ever. I am sure that the Revenue will keep a beady eye out for new schemes that try to marry the two conflicts—of buyers wanting to buy assets and sellers wanting to sell shares. The problem may be solved; otherwise, it may be an indication that it is time to make a change. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 197, in page 433, line 18, leave out from 'acquisition' to end of line 19.
 The amendment is about the rules for bringing Lloyd's syndicate capacity within the new intangible property regime. Paragraph 128 of the schedule applies the new intangible property regime to existing syndicate capacity at Lloyd's—that is, the right that a corporate member of Lloyd's has to underwrite in syndicate. Syndicate capacity is already dealt with under an income regime for corporation tax purposes. 
 It therefore makes sense immediately to bring existing capacity into the new rules. Lloyd's made representations to that effect during the consultation and is satisfied with what has been agreed. 
 The amendment concerns paragraph 128(4), on which the Treasury's explanatory note states: 
 ''Paragraph 128(4) ensures that reinvestment relief under Part 7 is not prohibited on the realisation of existing capacity by virtue of the requirement in paragraph 38(1)(a) that the asset may have been a 'chargeable intangible asset' throughout the period it is held.'' 
That is covered by the decision, which is to be supported, to bring existing capacity within the new rules. A corporate member of Lloyd's who acquired a syndicate capacity in 1998 and realised in 2003 would be able to qualify for full reinvestment, provided they met the reinvestment requirements. 
 The wording of paragraph 128(4) seems not to achieve the result stated in the Treasury's note. It states: 
 ''For the purposes of Part 7 (roll-over relief on realisation and reinvestment) the asset shall be treated as if it had been a chargeable asset from the time of its acquisition or, if later, the beginning of the first accounting period to which this Schedule applies in relation to it.'' 
That would surely mean that the capacity would be treated as having been acquired in 1998, when it was acquired, or if it were acquired later it would be considered to have been acquired on 1 January 2002. A significant period of ownership would therefore not qualify for reinvestment relief. That seems to be the opposite of the Government's intention, and if that is so it surely needs correcting, which is what the amendment is designed to do. 
 The wording of paragraph 128(4) continues to baffle the tax lawyers advising Lloyd's, who remain convinced that it states the opposite of what is both intended and in the Treasury notes. I hope that the Economic Secretary can place something on the record to make the wording mean what the Government intend it to mean.

John Healey: As the hon. Gentleman has explained, the amendment's purpose is to ensure that roll-over relief is not restricted in the case of an intangible asset that is a syndicate capacity at Lloyd's. He is right to say that the provision in question is intended to ensure that there is no such restriction. Even I can see that the wording of the paragraph may not be as clear as it ideally might be. Leaving aside interesting syntactical arguments over the precise meaning of the words in paragraph 128(4), although Lloyd's regards it as baffling there is only one way in which it could be interpreted. The provision will ensure that relief is not restricted, which is precisely the result that the hon. Gentleman is seeking.
 On that basis, the amendment is not needed. The hon. Gentleman asked me to confirm that on the record, and I am happy to do so. I assure the Committee that the provision can, and will, be construed to ensure that there is no restriction on roll-over relief in those circumstances. I have listened carefully to what the hon. Gentleman has said and I have to concede that there is some merit in the amendment, which some would regard as belt and 
 braces. Nevertheless, I should like to give the matter further thought, not least because a similar issue arises in relation to paragraph 127(3). 
 If necessary, the Government will table amendments to both provisions on Report. With that assurance and the confirmation that I placed on the record, I ask the hon. Gentleman to withdraw the amendment.

Howard Flight: I thank the Economic Secretary for his helpful comments. I look forward to the matter being sorted out one way or t'other. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendment proposed: No. 212, in page 438, line 19, leave out 'group relief' and insert 'relief against total profits'.—[John Healey.]

Joe Benton: With this it will be convenient to take Government amendments Nos. 213 and 214.

Howard Flight: I am now in a state of disorganisation and not certain whether the amendment to which you have just referred, Mr. Gale, is that which I wish to talk about. I stood up originally to raise something under a stand part debate on schedule 29. Which amendment are we referring to?

Joe Benton: We are discussing Government amendment No. 212, with which we are taking amendments Nos. 213 and 214.

Howard Flight: I do not wish to oppose those amendments, but I should like the opportunity to raise another issue under schedule 29.
 Amendment agreed to. 
 Amendment made: No. 213, in page 439, line 3, at end insert— 
'existing asset paragraph 118(3)'.—[John Healey.]
 Question proposed, That this schedule, as amended, be the Twenty-ninth schedule to the Bill.

Howard Flight: I thank you, Mr. Gale, and I apologise.
 Although I have not tabled an amendment on the issue, I want to mention the insurance industry's position. We have already dealt with the position of Lloyd's, and I want to deal with the major reform introduced by clause 83 and schedule 29, which provides tax relief for purchasing goodwill and other intangible assets. The insurance industry's concern is that, although insurance companies writing life assurance business are within the regime in which they purchase royalties and computer software, they are not benefiting and will not benefit from the goodwill reform. Paragraph 78(1) excludes intangible fixed assets held for the purpose of life insurance business. The reason why that is the case is a fundamental question. Surely, if a life insurance company purchases goodwill, it should be treated as any other company. 
 I suspect that the Government's argument for exclusion will be that the special method of taxation for life insurance companies, known as the IE system—income minus expenditure—is primarily a charge on policyholders' investments, and that goodwill relief is a matter for shareholders. It may be accepted that the new regime needs to be adapted so that it applies appropriately to the IE system, but surely goodwill held by shareholders outside the insurance companies' long-term business fund should in principle be entitled to the relief available to most other corporate taxpayers. 
 The Government's decision not to allow relief for goodwill purchased by insurers writing life assurance business, and held outside the long-term business fund, contrasts with their acceptance of the principle elsewhere in the Bill of the exemption from tax of capital gains on substantial shareholdings. Elsewhere, shares held by a life insurance company outside the long-term business fund qualify for relief, just as the shares of any other company would. 
 What is the logic on which the particularly narrow category of outside assets of the insurance industry has been excluded? Do the Government have the matter under consideration, and are they likely to include it, according to the logic of what they have done in other parts of the Bill?

John Burnett: I should like to raise a small point of clarification with the Economic Secretary. Paragraph 56 is headed:
''Roll-over relief on reinvestment: application to group member''. 
The Law Society has brought to my attention the fact that it is not clear from paragraph 56(2)(b) whether the disposing company still needs to be a member of the group when the expenditure on other assets is incurred. It should not be necessary for the disposing company to remain a member of the group and I look forward to hearing the Government's view on that from the Economic Secretary. If there is doubt, I hope that an appropriate amendment can be tabled on Report so that the model contained in section 175(2A) of the Taxation of Chargeable Gains Act 1992 can be followed in such circumstances. It is not wise to have the inflexibility that could be construed as being part of this provision and I hope that the Economic Secretary will give us his interpretation of the provision, and tell us whether he believes that the more benign construction is more appropriate and, if there is any doubt, that an amendment will be tabled on Report.

Chris Grayling: I want to make a brief probing point and I apologise to the Economic Secretary if he covered it in his earlier comments when I had to slip down the Corridor to a Select Committee.
 The Economic Secretary will be aware that in the telecommunications and media sectors there have recently been some substantial write-downs of intangible assets following, for example, the Vodafone acquisition of Mannesmann. What would be the tax implications for substantial write-downs and future potential write-downs of 3G licences? 
 John Healey: Perhaps I may take those points in reverse order and deal first with that raised by the hon. Gentleman. I understand the tension between Select and Standing Committees, having experienced that myself. I refer him to the Official Report because substantial write-downs were dealt with earlier in our discussion. If he feels that I did not respond adequately to his hon. Friend the Member for Fareham, I encourage him to tackle me again.
 The hon. Member for Torridge and West Devon asked about group roll-over provisions. My advice is that the rules already have the effect that he wants, so it is unnecessary for the measure to be amended. 
 On the specific concerns raised by the hon. Member for Arundel and South Downs about the life assurance industry, he will not be surprised to know that the Association of British Insurers has already raised the matter with the Revenue. I shall try to give an explanation of the provisions as they stand and then some encouragement and an assurance that significant consideration is being given to such matters. 
 The hon. Gentleman asks why a life company does not receive any relief for write-down of its goodwill under the schedule. There are two reasons. The way in which we tax life assurance companies on the income accruing for policyholders means that it would not be appropriate to allow write-down of goodwill against policyholders' income. Goodwill relates entirely to the shareholders. The ABI accepts that as a reasonable argument and I believe that the hon. Gentleman acknowledged it. As a rule, goodwill is only ever acquired by a life company for payment if there is what the schedule calls a tax-neutral transfer. That means that goodwill would never become an asset subject to the schedule. 
 However, the ABI believes that there may be cases in which goodwill is purchased from unconnected parties and is not held in the life company's long-term business fund, which is the point that the hon. Gentleman made. The ABI argues, as he did, that in such a case relief should be given. I am not persuaded that the case for giving relief in such circumstances is strong enough. It is certainly not right for relief of that type of goodwill to be set against policyholders' income, and the existing capital gains reliefs, like indexation and roll-over, remain available for it. 
 Let me also say that rules for life assurance taxation will not be static during the next few years. In the Budget, my right hon. Friend the Chancellor announced that consultation on reforms to corporation tax would start later this summer. Clearly, such reforms will include life assurance company taxation. Changes are also likely because of developments elsewhere, such as the Financial Services Authority's review of regulatory reporting requirements, which are used for tax purposes. 
 The hon. Gentleman asked for confirmation that the matters that he raised are under consideration. I hope that my explanation suggests that that is the case. I assure him that the treatment of goodwill will be kept fully in mind when considering any possible future changes. 
 Finally, as this is a clause stand part debate, I conclude by saying that I welcome the broad support of the Committee for the new provision, which puts in place a comprehensive regime that will provide consistent treatment of a company's expenditure and receipts in respect of intangible assets. The new regime replaces what I described previously as an outdated, incoherent accretion of rules based on previous judicial decisions and occasional legislation stretching back for more than 150 years. It is a significant further step in the Government's programme of corporate tax reform. The measure has been subject to extensive consultation, which has produced a better set of provisions. The end result is that the reform has been widely welcomed outside the House, and I hope that it will also be supported by the Committee.

Howard Flight: I agree with the Economic Secretary that the reforms are broadly welcomed and again express appreciation for all the work that the Inland Revenue has done in addressing difficult issues.
 On the specific insurance point that I raised, I was pleased to hear the Economic Secretary's comments. Materiality is the crucial issue. If the Government were to perceive a material aspect, they would probably see the justice of the argument. However, overall, the measures are very welcome.

John Burnett: The provisions are welcome, and I am grateful for the Economic Secretary's assurance on degrouping. So that it is absolutely clear for the record, is it the Government's view and intention that it should not be necessary for the disposing company to remain a member of the group when the expenditure on other assets is incurred? That is my understanding of what the Economic Secretary said.

John Healey: That is correct.
 Question put and agreed to. 
 Schedule 29, as amended, agreed to.

Schedule 30 - Gains and losses of a company from intangible fixed assets: consequential amendments

Amendment made: No. 214, in page 442, line 26, leave out 'royalties in respect of'.—[John Healey.] 
 Schedule 30, as amended, agreed to.

Clause 104 - Valuation of trading stock on transfer of trade

Howard Flight: I beg to move amendment No. 185, in page 81, line 29, after 'assets', insert 'to a connected person'.
 The amendment has been suggested to us by the Institute of Chartered Accountants because it feels that introducing a fiscal requirement to account for stock and work in progress on a just and reasonable basis would impose quite unrealistic obligations on parties who were actually at arm's length. 
 John Healey: Before discussing the amendment itself, let me explain the background to Clause 104. The clause is designed to modernise the rules governing the valuation of trading stock on the transfer of a trade. It removes existing anomalies and puts the treatment of trading stock in these circumstances on a basis that is comparable with other tax rules, including the new code for intangible asset that we have just been debating.
 Under current law, trading stock that is transferred when a new owner takes over is generally—and in the circumstances that the clause is directed towards, always—brought into account in the amount of the consideration agreed between the parties. That is out of line with the capital allowances and capital gains rules. In both cases, asset values are determined by apportioning the total consideration paid for the trade on a just and reasonable basis. 
 That approach is not quite the same as that proposed under schedule 29 for transfers of intangible assets, but it is essentially compatible with it. Schedule 29 is founded on a just and reasonable apportionment of the consideration passing on the transfer of a business. However, it goes a step further in requiring where possible that an apportionment made in a company's accounts is to be regarded as ''just and reasonable''. 
 The rule for trading stock, on the other hand, is not compatible with what is proposed for intangibles or with the current rules for capital allowances and capital gains. The incompatibility of the current rules can give rise to anomalies, with businesses in some cases being taxed on amounts in excess of the total consideration paid for the trade. That is manifestly unfair. In other cases, businesses obtain more tax relief than the total amount that they have paid. That is also wrong. The new rule should put an end to these anomalies. The arrival of the new intangibles regime has made change in this area more urgent, but it is a change that is desirable in its own right. We are therefore applying that change for income tax as well as corporation tax, and regardless of whether the assets of the trade transferred include intangibles. 
 The purpose of the amendment is to restrict the ''just and reasonable'' rule to cases where the parties to the transfer of a business are connected persons. The Committee will not be surprised, in light of what I have said about the reasons for introducing the clause, that I cannot accept the amendment, which is both misconceived in concept and drafted in such a way that it would not achieve the purpose that the hon. Member for Arundel and South Downs is anxious to secure. 
 The amendment is misconceived because it would leave in place incompatible tax rules and perpetuate the anomalies to which I have referred. The existing capital allowance and capital gains rules do not limit ''just and reasonable apportionment'' to cases where the parties are connected, and I see no reason why the proposed rule for stock should do so. Those businesses that ended up being taxed on more than their total sale proceeds would not thank the hon. Gentleman. 
 It is hard to see why this change should impose any unreasonable obligation on taxpayers. On the contrary, it will provide for consistent treatment of the various assets bought and sold on the transfer of a trade. It will therefore make the system easier to operate and fairer. The existing capital gains and capital allowances rules, with which the clause would align the treatment of stock, have not, as far as I am aware, imposed unreasonable burdens on business. These rules have not been a prominent subject in the Budget representations made by business or specialist tax practitioners. 
 I do not, therefore, accept the principle behind the amendment, that the allocation of the overall sale proceeds on the transfer of a business should be capable of being overridden for tax only when the parties are connected with one another. In any event, the amendment would not have its intended effect. It would not provide for the value of trading stock to be determined on the basis of a just and reasonable apportionment in cases where a business is transferred between connected persons. That is because the transfer of trading stock in these circumstances is already subject to a different rule. In these circumstances, the value of the trading stock is the value that would have been placed on it if the stock had been transferred between independent parties acting at arm's length. 
 I refer the hon. Gentleman to section 100(1)(a) of the Income and Corporation Taxes Act 1988. The clause, with or without the amendment, has no impact on that special rule. The amendment, by confining the impact of the clause to situations where it has no effect, is equivalent to removing the clause from the Bill. Therefore I cannot support it, and if the hon. Gentleman decides to press it to a vote I shall ask the Committee to reject it.

Mark Hoban: May I just establish the issue of the valuation of stock? I have practised as a chartered accountant and worked on transactions in which the apportionment of considerations is important. Ordinarily, I would expect that stock to transfer at a value determined in line with United Kingdom GAAP. Is the expectation in the clause that the value under UK GAAP does not necessarily equal a just and reasonable apportionment of consideration?
 If we are talking about a divergence in valuation, the amendment tabled by my hon. Friend the Member for Arundel and South Downs is important because it seems unnecessary to add an additional layer of complexity to a transaction over and above that which normally arises through the valuation of stock in determination of consideration, goodwill or other aspects of a transaction. There is a perfectly reasonable valuation technique available in UK GAAP and it would be odd to introduce another one when we are referring to the just and reasonable apportionment of consideration. 
 John Healey: As I explained earlier, I do not accept that the provision introduces additional complexity. There is a much stronger argument that the better alignment and greater coherence in the proposal will make things easier for business, not more complicated.
 The short answer to the hon. Gentleman's question about the valuation of stock being the same as under the GAAP provisions is that it nearly always is.

Howard Flight: The Minister's latter comment is the crucial point. Perhaps I should have made it clear that this is a probing amendment. As it was suggested by the Institute of Chartered Accountants I thought that the Government would want to take it seriously. The chartered accountants' underlying point, on which my hon. Friend the Member for Fareham commented, is that ''just and reasonable'' needs to mean GAAP accounting treatment for arm's length parties; and if, while understanding the consistency arguments, the Government were thinking of some other accounting basis it would not be reasonable.
 To judge by what the Minister said, the problem has probably been solved, but I trust that the Government will consult the Institute of Chartered Accountants to ensure that everyone is happy about it. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 104 ordered to stand part of the Bill. 
 Clause 84 ordered to stand part of the Bill.

Schedule 31 - Gains of insurance company from venture capital investment partnership

Amendments made: No. 215, in page 447, line 32, leave out to end of line 19 on page 448 and insert— 
 'Meaning of ''venture capital investment partnership''
2 (1) A ''venture capital investment partnership'' means a partnership in relation to which the following conditions are met. 
 (2) The first condition is that the sole or main purpose of the partnership is to invest in unquoted shares or securities. 
 This condition shall not be regarded as met unless it appears from— 
 (a) the agreement constituting the partnership, or 
 (b) any prospectus issued to prospective partners, 
 that that is the sole or main purpose of the partnership. 
 (3) The second condition is that the partnership does not carry on a trade. 
 (4) The third condition is that not less than 90% of the book value of the partnership's investments is attributable to investments that are either— 
 (a) shares or securities that were unquoted at the time of their acquisition by the partnership, or 
 (b) shares that were quoted at the time of their acquisition by the partnership but which it was reasonable to believe would cease to be quoted within the next twelve months. 
 (5) For the purposes of the third condition— 
 (a) the following shall be disregarded— 
 (i) any holding of cash, including cash deposited in a bank account or similar account but not cash acquired wholly or partly for the purpose of realising a gain on its disposal; 
 (ii) any holding of quoted shares or securities acquired by the partnership in exchange for unquoted shares or securities; 
 (b) whether the 90% test is met shall be determined by reference to the values shown in the partnership's accounts at the end of a period of account of the partnership. 
 (6) Where a partnership ceases to meet the above conditions, the company shall be treated as if the partnership had continued to be a venture capital investment partnership until the end of the period of account of the partnership during which it ceased to meet the conditions. 
 (7) A partnership that ceases to meet those conditions cannot qualify again as a venture capital investment partnership. 
 For this purpose a partnership is treated as the same partnership notwithstanding a change in membership if any person who was a member before the change remains a member.'.
 No. 216, in page 449, line 3, leave out sub-paragraph (3). 
 No. 217, in page 449, line 44, at end insert— 
 '(3A) The operation of sub-paragraph (3) is not affected by the partnership having ceased to be a venture capital investment partnership before the time at which the distribution is treated as received by the company.'.
 No. 218, in page 450, line 37, at end insert— 
 'Investment in other venture capital investment partnerships 
 8A (1) For the purposes of paragraph 2 (meaning of ''venture capital investment partnership'') an investment by way of capital contribution to another venture capital investment partnership shall be treated as an investment in unquoted shares or securities 
 (2) The Treasury may by regulations make provision, in place of but corresponding to that made by paragraphs 3 to 8, in relation to gains accruing on a disposal of relevant assets by such a partnership. 
 (3) The regulations may make provision for any period of account to which, in accordance with paragraphs 10 to 12, this Schedule applies.'.
 No. 219, in page 451, line 11, at end insert 
'and also includes any debentures'.
 No. 220, in page 451, line 22, at end insert— 
 '(3) References in this Schedule to capital contributed to a limited partnership include amounts purporting to be provided by way of loan if— 
 (a) the loan carries no interest, 
 (b) all the limited partners are required to make such loans, and 
 (c) the loans are accounted for as partners' capital, or partners' equity, in the accounts of the partnership.'.
 No. 221, in page 451, line 22, at end insert— 
 (4) For the purposes of this Schedule the assets of— 
 (a) a Scottish partnership, or 
 (b) a partnership under the law of any other country or territory under which assets of a partnership are regarded as held by or on behalf of the partnership as such, 
 shall be treated as held by the members of the partnership in the proportions in which they are entitled to share in the profits of the partnership. 
 References in this Schedule to the company's interest in, or share of, the partnership's assets shall be construed accordingly.'.—[Ruth Kelly.]
 Schedule 31, as amended, agreed to. 
 Clause 85 ordered to stand part of the Bill.

Schedule 32 - Lloyd's underwriters

Howard Flight: I beg to move amendment No. 105, in page 453, line 3, after 'effect', insert
'in the corresponding underwriting year'.
 The Chairman: With this we may discuss the following amendments: Government amendment No. 205.
 No. 106, in page 453, line 16, at end insert 
'and for the purposes of section 172 above shall be treated as a payment made at the time the contract takes effect.'.
 No. 107, in page 454, line 5, after 'effect', insert 'in the accounting period'. 
 Government amendment No. 206. 
 No. 108, in page 454, line 22, after 'contract', insert 
'at the time the contract takes effect'.

Howard Flight: Schedule 32 deals with the tax treatment of what tax legislation terms ''quota share contracts'' at Lloyd's, a term that is already defined in the Finance Acts of 1993 and 1994. I understand that these provisions do not affect all the commercial quota share reinsurance contracts that Lloyd's members may enter into, but only specific forms of reinsurance contract under the rules and practices of Lloyd's, such as exeat policies and some estate protection plans.
 The first part of the schedule—paragraphs 1 to 5—amends the 1993 Act provisions for individual members of Lloyd's. The second part deals with corporate members as per the 1994 Act, but the two are broadly parallel. As I understand it, the purpose of the schedule in each case is to remedy deficiencies in the original legislation that could have led to Lloyd's members getting too little or too much tax relief when they took out such a policy. 
 For example, if a Lloyd's member pays a cash call into a syndicate to meet losses, that injection of funds can be expected to reduce the price that he would later have to pay to take out a personal reinsurance policy. However, the cash call is not itself a deductible expense, and if the syndicate's taxable result is not declared before the policy takes effect, the member will get no relief for the amount paid in by way of the cash call. 
 Conversely, existing legislation could in certain circumstances give too much relief. That could happen, for example, if the syndicate has already declared a loss for tax purposes before the quota share contract takes effect, but has not called the loss from its members. In that case, the Lloyd's member might effectively get relief twice for the same economic loss. 
 I shall first address amendments Nos. 105 and 107, which go together, and then amendments Nos. 106 and 108. The first two concern the proposed restriction of relief as it applies to contingent contracts. Amendment No. 105 deals with individuals, and amendment No. 107 with corporates. 
 I shall focus on amendment No. 105. There exist within Lloyd's a number of estate protection plans that are within the scope of clause 85 and schedule 32. These are personal reinsurance polices that are contingent on the death of the underwriting member. As a matter of legal construction, the same issue arises in the provisions dealing with corporate members of Lloyd's, although I am not aware that it is a practical concern, at least at present. The purpose of the amendment is to clarify the operation of the provisions. 
 Let us take the case of individual members. Paragraph 2 of the schedule provides that the premium under such a policy is wholly tax-deductible if the contract does not come into effect. If the contract comes into effect the deductible amount is restricted by any transferred losses that are declared before that date. The practice at Lloyd's is that members who take out estate protection plans usually pay a premium in the December of one year to cover themselves for events in the following calendar year. For example, the premium paid in December 2002 will purchase cover for calendar year 2003. That gives rise to the practical issue that the premium is tax deductible as an expense in the income tax year 2002-03. Paragraph 2 of schedule 32 might be read as requiring members to wait until December 2003 before they can know by how much the premium is tax deductible for that year. Members cannot know before then whether they will die in circumstances such that the tax deduction will be restricted under the proposed new section. 
 I am sure that the Government do not intend that members of Lloyds should be unable to make their tax returns for an income tax year until after the following 31 December. The amendment deals with that uncertainty in a practical way by requiring the member to look only at events that occur up the end of the corresponding underwriting year. The parallel amendment for corporate members requires the corporate member similarly to look only at events that occur up to the end of the year. I hoped that the Minister would confirm that that was the intention, although it is not specifically stated. Alternatively, she may acknowledge the problem and say that the Revenue will accept provisional figures, which is not as good as tidying up the matter but would partly deal with it.

Ruth Kelly: I thank the hon. Gentleman for that lucid and helpful exposition. I do not intend to detain the Committee with an exposition of the clause itself. The case for it has been well made by the hon. Gentleman. It corrects defects in the legislation dealing with quota share contracts taken out by Lloyd's members. The hon. Gentleman also made the case for conditional contracts and raised issues that I found persuasive. I do not know whether he wants to hear the good news first or the bad news. The good news is that we accept the case that he makes: the bad news is that we do not accept the precise wording of his amendments, as he may have deduced.
 The amendments seek to fix the time by which a deduction may be made for premiums paid by Lloyd's members in respect of quota share contracts. Time here, of course, means the relevant years of assessment for individuals or accounting periods for corporate bodies. Amendments Nos. 105 and 107 cover the case of a conditional contract where the condition is never met and as a consequence, the contract, in the wording of the proposed legislation, never ''took effect''. In that type of case, the legislation as drafted allows a deduction equal to the amount of the premium. Where the condition is not satisfied, existing law would 
 already allow a deduction for the premium in the year of assessment or accounting period in which it is paid. The provisions of schedule 32 do not alter that. 
 It is, of course, not possible to know for certain until the period covered by the contract has actually ended whether the contract will take effect. For that reason, the actual amount deductible cannot be determined until that time. However, existing law and practice allow an estimate to be made and a deduction claimed at the time that the premium is paid. When the actual amount allowable is finally determined an adjustment may be made if necessary. 
 Amendments Nos. 106 and 108 deal with different circumstances: payments of cash by a member to a syndicate to meet expected losses before those losses have been formally declared. The aim of the provisions of schedule 32 is to ensure that relief is available where appropriate for those cash calls. As these amendments rightly identify, while the Bill ensures that relief is available where the necessary conditions are met, it is silent about when the relief is due. We agree that the omission needs to be rectified and we are grateful to hon. Members for drawing it to our attention. However, the wording of the amendment could give rise to ambiguity and so we have tabled our own amendments. I therefore urge the Committee to reject the amendment, which I know the hon. Member for Arundel and South Down tabled in good faith. Perhaps he will withdraw it and accept instead the Government amendments.

Howard Flight: I spoke at some length on amendments Nos. 105 and 107, but not on amendments Nos. 106 and 108 because Government amendments Nos. 205 and 206 address the same issues. The issue is providing a timing rule to specify when further relief may be given if a cash call is later deemed to be an amount payable under a share quota contract that was previously lacking. It was not clear from the Financial Secretary's response whether Government amendments Nos. 205 and 206, which I have not seen, will cover the issues raised by amendments Nos. 105 and 107.

Ruth Kelly: The advice that I received is that Government amendments Nos. 205 and 206 will not cover the issues raised by amendments Nos. 105 and 107, but the existing law covers the points that the hon. Gentleman has made. The substance of our amendments will clarify the wording that he proposes and express it in a more structured way. The precise issues about which he is concerned are not matters of substance, and we now have a framework that does the job that he has requested.

Howard Flight: I am sorry to be a slight bore, but I am jolly happy about what the Financial Secretary has said in relation to amendments Nos. 106 and 108. However, she said that the legislation is intended to provide what amendments Nos. 105 and 107 seek to achieve. There is an issue, and it would be useful to make it clear on the record that that is what it is all about.
 Ruth Kelly: To reassure the Committee and repeat what I said earlier, amendments Nos. 105 and 107 cover conditional contracts in which the condition is not met and as a consequence the contract, in the wording of the proposed legislation, ''does not take effect''. In such a case, the legislation allows a deduction equal to the amount of the premium. Where the condition is not satisfied, the existing law would already allow a deduction for the premium in the year of assessment or accounting period in which it is paid, and the provisions in schedule 32 would not alter that.
 Existing law and practice allow an estimate to be made and a deduction to be claimed at the time the premium is paid, which is the particular point to which the hon. Gentleman referred. If he were to refer to section 172 of the Finance Act 1993, he would see the legislation set out there. I hope that I have reassured the Committee that the legislation will do precisely what we have clarified as its intention.

Howard Flight: I thank the Financial Secretary kindly for her explicit comments. Her comments and Government amendments Nos. 205 and 206 have addressed the issues that we raised with amendments Nos. 106 and 108, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendments made: No. 205, in page 453, leave out lines 15 and 16 and insert— 
'(a) for the purposes of subsection (1)(c)(i) and (3A) above, as an amount payable under the contract, and 
 (b) for the purposes of section 172, as a payment made at the time the contract takes effect.'
 No. 206, in page 454, line 22, leave out from 'treated' to end of line 23 and insert— 
', for the purposes of subsections (1)(b)(i) and (3A) above, as an amount payable under the contract at that time.''.'.—[Ruth Kelly.]
 Schedule 32, as amended, agreed to.

Clause 86 - Life policies etc: chargeable events

Howard Flight: I beg to move amendment No. 187, in page 60, line 35, at end insert—
 '(1A) Section 539 (introductory) is amended as follows.
 (1B) In subsection (1) (scope of Chapter II of Part XIII of the Taxes Act 1988) after ''policies of life insurance, contracts for life annuities and capital redemption policies'', insert ''but any gain falling to be treated as taxable income by virtue of this Chapter shall be disregarded from total income in applying section 257(5) (reduction in personal allowance for elderly taxpayers by reference to total income).''.'.
 The amendment is designed to address a problem that I raised on the Floor of the House in relation to the allowances of individuals, particularly retired people, and the operation of the law on insurance policies. 
 When a United Kingdom insurance policy is issued, the saver gets a credit equal to the basic rate of tax. Only higher-rate taxpayers have to pay tax, and then at a rate equal to the excess of the higher over the basic rate of tax. As the Minister is aware and has confirmed, 
 the gain arising on the policy is included in individuals' total income for the tax year for the purposes of allowances, even though they may have no tax to pay when the policy matures. That can have the effect in the year in question of removing completely age-related personal allowances, which are becoming of greater relevance to those who are in retirement in the latter part of their lives. That seems very unfair, as it simply penalises the older saver. 
 The amendment is designed to separate the two: it would keep the provisions that impose a tax charge on life assurance gains, but ignores the deemed income in determining whether there should be a clawback of the elderly person's higher allowances. There will still be the tax liability as it stands, if any, on the insurance policy, but people will not be punished further for having virtuously saved for their old age.

Edward Davey: I support the amendment, because I have had reason to write to the Paymaster General on two separate occasions, urging the Government to go down the very route that the hon. Member for Arundel and South Downs has so ably put forward.
 It is important that all Committee members realise what is at stake here. Many pensioners on very modest incomes have chosen to save for their retirement using the devices mentioned in the clause, through insurance policies and so on. It just so happens that when their bonds or policies come to be cashed in, although they 
 have fairly modest incomes the rest of the time, the gain added to their income in that year takes them well above the age allowances and can result in them paying significant amounts of income tax for that year. Those pensioners are often on modest incomes and have scrimped and saved to buy those policies.

Michael Jack: Is the hon. Gentleman talking about a qualifying or a non-qualifying policy?

Howard Flight: Qualifying.

Edward Davey: I am grateful for the intervention by the hon. Member for Arundel and South Downs clarifying the position. I thought that I was talking about qualifying policies. The right hon. Member for Fylde has great technical knowledge, and he may wish to intervene further if he thinks that they are non-qualifying. I had understood that they were qualifying because that would be in the general framework of the law in this area.
 The political point that I want to make, which the Government should take on board, concerns the group of people we are talking about. They are not extremely wealthy pensioners who would suddenly receive an extra relief if the amendment were passed; they are people who are often on very modest incomes. Although hundreds of thousands of people may not be affected by that unfairness, a number of people are. 
It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Two o'clock. 
Gale, Mr. Roger ( 
 Chairman 
 Brennan, Kevin 
 Burnett, Mr. 
 Casale, Roger 
 Cruddas, Jon 
 Cunningham, Mr. Jim 
 Davey, Mr. Edward 
 Field, Mr. Mark 
 Flight, Mr. 
 Grayling, Chris 
 Harris, Mr. Tom 
 Healey, John 
 Hendrick, Mr. 
Hoban, Mr. 
 Jack, Mr. 
 Kelly, Ruth 
 Luff, Mr. 
 Luke, Mr. 
 McKechin, Ann 
 Marris, Rob 
 Primarolo, Dawn 
 Pugh, Dr. 
 Ryan, Joan 
 Smith, Angela 
 Sutcliffe, Mr. 
 Wright, David